Nation`s Banks Follow Fed, Decrease Prime

NEW YORK — The nation`s banks Monday lowered their prime rate to 10 percent from 10.5 percent following the Federal Reserve`s aggressive move to boost the sluggish economy.

Florida`s major financial institutions, including Southeast National Bank and Amerifirst Federal Savings & Loan, were among those joining the parade.

Chase Manhattan Bank and Citibank moved late Friday immediately after the Fed`s announcement that its discount rate, the rate it charges financial institutions for short-term borrowings, would be 7.5 percent effective Monday, down from 8 percent and the lowest in almost six years.

Virtually all of the nation`s largest banks, trendsetters for the industry, adopted the 10 percent prime Monday.

``The banks reacted to what was a surprisingly aggressive cut in discount rate in the sense that the Fed moved to 7.5 percent before the federal funds (overnight) rate and other key market rates were below 8 percent,`` said David M. Jones, economist at Aubrey G. Lanston & Co. ``That is a sign that the Fed means business.``

The Fed said it acted out of concern for the general weakness in the economy. Although the most recent government indicators show some recovery from the sluggish first quarter, some sectors, including industrial and agriculture, continue to languish.

Reflecting this weakness, Jones said the prime rate could come down to 9 percent by year-end.

For large businesses, banks long have negotiated borrowing rates tied to commercial paper and other market instruments, but for small and medium-sized businesses whose loans are pegged to prime, the lower rate is good news indeed.

``Mortgage rates could come down fairly soon,`` Jones said. ``But the last people to benefit will be consumers, who will continue to pay relatively high rates. Banks have tended to keep consumer rates unusually high because of the need to provide large amounts of reserves for bad loans in other sectors, such as to less developed countries and domestically in the energy, real estate and agriculture areas.``